Hi,
I have been trading various financial markets for the last five years and eventually came to a conclusion that I know only of two strategies that can provide a decent income to a sloppy retail trader with limited time to monitor markets. The purpose of this post is to outline some basics of my strategy to see if anyone else is trading it as well as to ask for a feedback. I am aware that there is plenty of information that "I don't know that I don't know" and therefore I am hoping that the discussions on this forum will shed some light on the potential shortcomings and ways to generate more income.
To understand where I am coming from let me describe my beliefs about the stock market and what I am trying to achieve there:
I believe in the following:
- It is possible to make money in the markets
- The markets are random and all available information is quickly priced in which means that while there are some slight inefficiencies that appear from time to time these are quickly discovered and eliminated
- Technical analysis does not work and most of the people using technical indicators simply have never tested any of them. Statistical probability of all indicators is exactly 50% meaning that in the long term they are not better then flipping a coin.
- Retail traders are at a huge disadvantage when it comes to trading as they compete with better equipped institutional traders
What I am trying to achieve:
- Generate a stable return of 20-30% p/a over long periods of time
- Have a number of systems for different market types.
Now, after the short introduction, let me describe the systems that I am trading.
The two systems that I am trading are:
- Volatility futures
- Selling vertical spreads
I will start with the second system - I am selling vertical spreads on commodity future options, index future options as well as interest rates and currency future options. So nothing new or earth shattering here. In order to be able to generate a fairly stable income I usually choose 40-70 days till expiry far out of the money options. Usual spread generates around $120 in premium with maximum downside of $1000. As I mentioned above I don't use technical analysis in any shape or form, however most of the trades are fairly directional I usually look at the chart and pick instruments that have reached their peak in the short term or are in the fairly strong uptrend. For example, when S&P has reached 1460 I thought that on the balance of probabilities it is unlikely go much higher up, I also usually calculate the maximum that the instrument can reach within given timeframe based on it's current volatility and sell options a bit above that level.
In most cases I would immediately put an order to close the spread if it has generated 50% of profit in the first week or two, if not then I wait for the whole spread to expire or close it when it reaches $10 or so.
Risk management is also pretty simple - I either close the spread based on my opinion about the market or wait for the underlying to reach the strike price of the sold option at which point I close or roll the spread at the market price.
As an additional risk management parameter I am never concentrated in any one commodity or correlated market, in addition I usually build my positions slowly over the course of several weeks. This way it prevents me from making a big mistake, every trader can give an example of the time when they have entered the market only to discover that it went south right after the trade has been executed.
I think it is enough for the first post, the second system is also simple but involves taking on much more risk, the additional good system that I know of (not guaranteed to make profit) but not currently trading due to the lack of time is called Fractional trading it involves CFDs and can be traded only through a handful of brokers, the risks in these systems are significant, therefore I will leave them for future posts. Please let me know what you think of the system and if you can find any apparent flaws in it.
I have been trading various financial markets for the last five years and eventually came to a conclusion that I know only of two strategies that can provide a decent income to a sloppy retail trader with limited time to monitor markets. The purpose of this post is to outline some basics of my strategy to see if anyone else is trading it as well as to ask for a feedback. I am aware that there is plenty of information that "I don't know that I don't know" and therefore I am hoping that the discussions on this forum will shed some light on the potential shortcomings and ways to generate more income.
To understand where I am coming from let me describe my beliefs about the stock market and what I am trying to achieve there:
I believe in the following:
- It is possible to make money in the markets
- The markets are random and all available information is quickly priced in which means that while there are some slight inefficiencies that appear from time to time these are quickly discovered and eliminated
- Technical analysis does not work and most of the people using technical indicators simply have never tested any of them. Statistical probability of all indicators is exactly 50% meaning that in the long term they are not better then flipping a coin.
- Retail traders are at a huge disadvantage when it comes to trading as they compete with better equipped institutional traders
What I am trying to achieve:
- Generate a stable return of 20-30% p/a over long periods of time
- Have a number of systems for different market types.
Now, after the short introduction, let me describe the systems that I am trading.
The two systems that I am trading are:
- Volatility futures
- Selling vertical spreads
I will start with the second system - I am selling vertical spreads on commodity future options, index future options as well as interest rates and currency future options. So nothing new or earth shattering here. In order to be able to generate a fairly stable income I usually choose 40-70 days till expiry far out of the money options. Usual spread generates around $120 in premium with maximum downside of $1000. As I mentioned above I don't use technical analysis in any shape or form, however most of the trades are fairly directional I usually look at the chart and pick instruments that have reached their peak in the short term or are in the fairly strong uptrend. For example, when S&P has reached 1460 I thought that on the balance of probabilities it is unlikely go much higher up, I also usually calculate the maximum that the instrument can reach within given timeframe based on it's current volatility and sell options a bit above that level.
In most cases I would immediately put an order to close the spread if it has generated 50% of profit in the first week or two, if not then I wait for the whole spread to expire or close it when it reaches $10 or so.
Risk management is also pretty simple - I either close the spread based on my opinion about the market or wait for the underlying to reach the strike price of the sold option at which point I close or roll the spread at the market price.
As an additional risk management parameter I am never concentrated in any one commodity or correlated market, in addition I usually build my positions slowly over the course of several weeks. This way it prevents me from making a big mistake, every trader can give an example of the time when they have entered the market only to discover that it went south right after the trade has been executed.
I think it is enough for the first post, the second system is also simple but involves taking on much more risk, the additional good system that I know of (not guaranteed to make profit) but not currently trading due to the lack of time is called Fractional trading it involves CFDs and can be traded only through a handful of brokers, the risks in these systems are significant, therefore I will leave them for future posts. Please let me know what you think of the system and if you can find any apparent flaws in it.
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